U.K. Government Spending Must Be Cut 2% a Year, Deloitte Says

 Cuts in U.K. government spending of two percent a year will be needed until at least 2014, squeezing Britain’s public services and stifling economic growth, Deloitte Economic Adviser Roger Bootle said.

The public sector will bear the brunt of additional fiscal tightening worth five percent of gross domestic product, or about 70 billion pounds ($115 billion) a year over the next five years, Bootle said in an e-mailed statement today. These cuts would be additional to measures already announced by Chancellor of the Exchequer Alistair Darling, he said.

“After a decade or more in which rapid increases in public spending have lent powerful support to the U.K. economy, the great squeeze is about to begin,” Bootle wrote.

U.K. public borrowing is forecast to rise to 15 percent of GDP this year and public debt is approaching 100 percent of GDP, leaving the public finances in “the worst shape for more than 50 years,” said Bootle, who is Managing Director of Capital Economics Limited and was a Treasury adviser under Britain’s last Conservative government, which exited power in 1997.

“Alistair Darling put some measures in place to address the situation in April’s Budget. But they did not go nearly far enough. We estimate that a further fiscal tightening worth some five percent of GDP per annum -- or around 70 billion pounds -- will be needed over the next five years, and possibly much more.”

The cuts on their own would shave more than one percent off annual real economic growth compared with recent years, Bootle said. The effect would increase to a two percent reduction when the decline in growth in household income and spending is taken into account, he said.

‘Sluggish’ Growth

“Rates of economic growth are likely to remain pretty sluggish while the squeeze takes place,” Bootle said in his note. “And if the squeeze is too tight, the economy could fall back into recession.”

Consumer-related companies and sectors will be hardest hit by the squeeze, he said, with cut backs in public investment hitting the construction and transportation industries.

“It’s not all bad news,” he said. “The widespread consensus that drastic action is needed and justified to sort out the fiscal position presents the authorities with a once-in- a-generation opportunity to remodel the U.K. economy and to reduce its dependence on the state.”



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